Maritime Fuel Regulations

Maritime Fuel Regulations

August 6, 2018
Maritime Fuel Regulations
On January 1, 2020, new, more stringent maritime emission
the international sulfur standard to 3.5%. The 2008
regulations are scheduled to take effect for all ocean-going
amendments also specified that on January 1, 2020, the
vessels. Implementing major industry regulatory reform can
international marine fuel sulfur standard would fall to 0.5%.
cause uncertainty and market disruption. As a result,
However, the 2020 implementation date was contingent on
investment plans and market supply and demand might be
an IMO review to ascertain whether sufficient supplies of
affected, leading to rapid price changes.
low sulfur fuel would likely be available by the
implementation date. The review determined that fuel
The International Maritime Organization supplies could be expected to be available, and in October
The International Maritime Organization (IMO) is a 171-
2016 the IMO decided to proceed with the January 1, 2020,
member United Nations agency that, among other things,
implementation date. Other studies forecast significant fuel
sets maritime fuel standards. The U.S. Environmental
shortages at the implementation date.
Protection Agency (EPA) participates on the U.S.
delegation to the IMO. The Maritime Environment
The sulfur fuel standards for U.S. ships, as well as all ships
Protection Committee (MEPC) is a group of member
operating in the North American and U.S. Caribbean ECAs,
nations within the IMO that is responsible for the
have been, and are, stricter than the international standards.
prevention of maritime pollution. Maritime pollution
Pre-2010, the standard was 1.5%, while from July 2010
standards are promulgated in the International Convention
through July 2015 the standard was 1.0%. In 2015, the
on the Prevention of Pollution from Ships, a treaty
allowable sulfur standard was reduced to 0.1%. As a result
designated “MARPOL.” Specifically, Annex VI of the
of the low sulfur content allowable for U.S. vessels, as well
treaty defines air pollution requirements for engines and
as all those entering the ECA, none of the new international
vessels.
standards, or their revisions, have affected those vessels
directly.
Air pollution standards under MARPOL were first adopted
in 1997 and became enforceable in 2005. Those standards
Adjusting to the 2020 Standards
specified maximum allowable sulfur concentrations in
Fuel for marine vessels is referred to as bunker fuel. Bunker
maritime fuels and maximum nitrogen oxide emissions
fuel is produced at oil refineries around the world. The
from engine exhaust. Annex VI of MARPOL was amended
refining process at those refineries, in brief, consists of
in 2008 to set tighter international sulfur standards.
heating a blend of crude oils. The lighter products, gasoline,
Additionally, at that time, the United States, Canada, and
diesel, and jet fuels, are boiled off and recovered. The
France requested the IMO to designate a North American
remaining, heavier fractions, which also retain most of the
Emission Control Area (ECA) of 200 nautical miles from
impurities, including sulfur, are called vacuum tower
the coasts of the United States, including Alaska and
bottoms (VTBs). These VTBs can be further processed into
Hawaii, and large portions of Canadian coastal waters, as
bunker fuel which varies in sulfur content depending on the
well as the French Islands of Saint Pierre and Miquelon.
sulfur content of the blend of crude oils entering the
Later the United States petitioned the IMO for a similar
refining process. Alternatively, the VTBs can be processed
ECA for the U.S. territories in the Caribbean including
in a coker unit to yield a blend of lighter products and
Puerto Rico and the U.S. Virgin Islands. The North
petcoke. Whether the VTBs are processed into bunker fuel
American ECA was designated in 2010, and became
or are further processed in a coker unit depends on the
enforceable in 2012. Designation as an ECA allows the
economic value of the resultant mix of products.
relevant countries to specify tighter emission specifications
on vessels operating in the ECA.
Vessel operators have three main alternatives available to
meet the 2020 international maritime sulfur limits.
IMO international pollution standards apply to both U.S.
Operators can choose to purchase low sulfur fuels, install
and foreign vessels. In addition, the North American ECA
remedial devices like scrubbers, which remove pollutants
maritime pollution standards apply to all vessels that enter
from the ship’s exhaust, or use non-oil based fuels, like
the ECA, including U.S. as well as foreign flag vessels. In
liquefied natural gas (LNG). Each alternative offers a
addition, U.S. vessels must also meet EPA fuel standards
different set of potential costs to operators, although each
and engine emission standards as specified in the Clean Air
can reduce sulfur emissions to the same extent, providing
Act.
the same improvements in air quality.
Fuel Standards
Low sulfur bunker fuel can be provided to the shipping
International marine fuel sulfur standards, pre-2012, were
industry either by investing in facilities at refineries that
set at 4.5% (mass-on-mass). The 2008 revisions of Annex
further process VTBs to lower the sulfur content, or mixing
VI of MARPOL, which became effective in 2012, lowered
higher value distillates (diesel, gasoil, or home heating fuel)
https://crsreports.congress.gov

Maritime Fuel Regulations
to lower the mass-on-mass sulfur content. In either case, the
Because of the expected shift in relative prices, with high
cost of bunker fuel is likely to rise. The Energy Information
sulfur product prices falling and low sulfur products rising,
Administration (EIA) provided an example to suggest the
it is likely that simple refineries that specialize in producing
possible magnitude of the cost increase associated with low
high-sulfur fuels will experience lower profitability, while
sulfur bunker fuels. The EIA examined the relative cost of
complex refineries that can produce larger product streams
low-sulfur gasoil (a distillate with 0.1% sulfur content) and
of low-sulfur products may experience higher profits.
high-sulfur residual fuel (3.5% maximum sulfur content) at
Capital investment in the refining sector is likely to increase
the Amsterdam-Rotterdam-Antwerp trading and refining
to allow refiners to maximize their returns to reflect the
hub in 2016. The EIA found that low-sulfur gasoil was
evolving relative prices of high and low-sulfur petroleum
persistently priced over $20 per barrel more than the high-
products.
sulfur residual. If the two fuels were mixed to meet the
2020 international sulfur standards, the cost increase for the
Crude oil prices, which reflect sulfur content, are likely to
resulting compliant fuel would reflect the proportions of the
adjust in favor of low sulfur grades while penalizing high-
two mixed fuels.
sulfur grades, making the heavy, high-sulfur crude oils
produced by Venezuela and Canada, for example, less
Meeting the 2020 sulfur standards through the use of
profitable in the face of declining demand. However, the
scrubbers is an alternative that offers the possibility of more
light, low-sulfur crude oil grades produced in the Bakken
fuel choice flexibility to vessel operators. Four main types
fields of North Dakota and the Eagle Ford and Permian
of scrubbers are available. Seawater scrubbers (open loop)
fields in Texas may become more profitable as their
use untreated seawater that possesses a natural alkalinity to
demand increases. Some pessimistic observers see the IMO
neutralize the sulfur in the vessel’s exhaust gas. Seawater is
regulations, in conjunction with other factors, affecting the
drawn from, and replaced to, the ocean. Freshwater
oil market in 2020 resulting in a price of $200 per barrel for
scrubbers (closed loop) use caustic sodas mixed with water.
crude oil and $6 to $10 per gallon for gasoline.
The circulating water is re-processed for further use. The
closed loop system uses about one-half the water, by flow
Costs to the shipping industry are likely to rise, but the
volume, of the open loop system. Hybrid scrubbers allow
magnitude of the increases might vary widely. The cost
for either open or closed loop operation. Open loop
results depend on what the size of the price premium for
operation is typically used when the vessel is in the open
low-sulfur fuel over heavy-sulfur fuel settles at and whether
ocean, while closed loop operation is typically used in
fuel access is unconstrained, or whether fuel shortages
harbors or other areas where discharge is prohibited. Dry
develop. Published annual cost estimates range from $5.8
scrubbers use no liquids, but clean exhaust gases by passing
billion to $52.6 billion, depending on the chosen values for
them through hydrated lime-treated granulates. This system
cost variables. Neither of these estimates include the cost of
produces no discharges from the vessel and the process
scrubbers; they only reflect the cost increases for those
produces a residual which can be used in the production of
vessel operators that choose to use low-sulfur fuels.
wallboard.
Increased shipping costs are likely to be passed through as
higher shipping rates that are likely to affect consumer
As a result of the small number of installed marine
prices for all goods shipped by sea.
scrubbers in operation, detailed cost studies are not
available. However, it is likely that retrofits will be more
A wide variety of non-oil sector industries might also be
expensive than new systems and closed systems are more
affected by the shifting product mixes of refiners that face
expensive than open systems.
differing economic incentives for high and low-sulfur
petroleum products and alter their product slates in
Vessel operators, especially if their vessels are relatively
response.
new, might convert them to use LNG. Also, newly
constructed vessels might utilize LNG or biodiesel
On-road transportation costs are likely to rise due to the
dedicated propulsion.
IMO regulations, with diesel fuel prices increasing. Again,
land shipping cost increases are likely to occur which will
The results of a survey concerning ship owner’s intentions
be passed on to consumers. If refineries, at least initially,
for meeting the 2020 sulfur requirements indicated that
respond to the IMO regulations by changing the gasoline
74% intend to purchase low-sulfur fuel, 19% intend to
and diesel fuel mix in favor of more diesel, gasoline prices
purchase a scrubber, 5% intend to switch fuels to LNG,
may escalate sharply.
while 2% had other, unspecified plans. These survey results
are likely to be provisional in that the precise relative costs
Issues for Congress
of meeting the sulfur standards are not known.
The IMO regulations for cleaner maritime fuels will go into
effect on January 1, 2020. Considerable uncertainty exists
Affected Industries
as to the availability of the required clean fuels as well as
While global marine fuel demand is only about 4% of total
the price effects of the fuel conversion. If diesel, gasoline
world oil demand at 3.9 million barrels per day in 2018, it is
and maritime fuel prices increase sharply, shipping costs
expected that important effects may exist for many sectors
may rise, leading to price increases in many industries.
of the oil and petroleum products industry, as well as other
industries.
Robert Pirog, Specialist in Energy Economics
IF10945
https://crsreports.congress.gov

Maritime Fuel Regulations

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF10945 · VERSION 2 · NEW